The ways and means to unlock private finance for green growth A Report of the Green Growth Action Alliance
Acknowledgements The World Economic Forum wishes to thank all members of the Green Growth Action Alliance for their leadership and contributing time, data, case studies and opinions. These contributions form the core of this report. The Forum would also like to thank its knowledge partner Accenture, who synthesized and developed the content, and Simon Zadek, who provided guidance in his capacity as an advisor to the World Economic Forum on sustainability issues and Senior Fellow of the Global Green Growth Institute. The authors would like to specifically thank the following organizations that provided expert guidance, case studies, research and data, without which this report would not have been possible: - Bloomberg New Energy Finance - Climate Policy Initiative - Global Green Growth Institute - International Energy Agency - OECD - The World Bank - World Resources Institute The following organizations have also provided expert guidance for the report: - Brookings Institute - Overseas Development Institute - United Nations Environment Programme - UNEP Finance Initiative Disclaimer The viewpoints expressed in this report attempt to reflect the collective engagement of individuals as Green Growth Action Alliance members and do not necessarily imply an agreed position among them or institutional endorsement by any participating company, institution or organization involved in the Alliance, or of the World Economic Forum. World Economic Forum Geneva Copyright 2013 by the World Economic Forum Published by World Economic Forum, Geneva, Switzerland, 2013 www.weforum.org All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, or otherwise without the prior permission of the World Economic Forum. ISBN-13: 92-95044-65-7 / 978-92-95044-65-4 World Economic Forum 91-93 route de la Capite CH-1223 Cologny/Geneva Switzerland Tel.: +41 (0) 22 869 1212 Fax: +41 (0) 22 786 2744 contact@weforum.org www.weforum.org
Contents 2 Acknowledgements 4 Foreword 5 Preface 6 Executive Summary 9 Introduction 11 Part 1: Green Investment: Current Flows and Future Needs 18 Part 2: Unlocking Private Finance 25 Part 3: Catalysing Leadership and Private Investment 27 Appendices 38 References 3
Foreword Felipe Calderón, Chair, Green Growth Action Alliance Shaping a global economy fit for the 21st century is our greatest challenge. Such an economy in 2050 will satisfy the needs of more than 9 billion people, who will rightly demand equal opportunities for development. Delivering such inclusive development in a sustainable way, however, requires that we remain within the boundaries of what our planet can safely deliver. Economic growth and sustainability are inter-dependent, you cannot have one without the other, and greening is the pre-requisite to realizing both goals. Dramatic upgrades in technology, skills, policies and business models, along with an aligned public consciousness, are needed for the transition to a green growth pathway. Infrastructure required for sectors such as agriculture, transport, power and water under current growth projections stands at about US$ 5 trillion per year to 2020. This business-as-usual will not lead to a stable future, however, unless it achieves environmental and sustainability goals. This development needs to be greened by re-evaluating priorities, building capacity, -grade policies and improving governance, among other activities. Additional needed to meet the climate challenge for clean energy infrastructure, sustainable transport, energy efficiency and forestry is about US$ 0.7 trillion per year. Private financiers see these massive requirements as an opportunity. Today, we see major growth in clean energy, with financial flows worldwide approaching those in carbonintensive energy sources. Further, developing countries are proving an increasingly important source of capital. Since 2007, clean energy originating from outside the Organisation for Economic Co-operation and Development (OECD) grew at 27% per year compared with 10% per year from OECD countries, albeit from a far lower base. Yet today, despite signs of increasing private finance into clean energy and other green s, there remains a considerable shortfall in. Closing this gap is our collective task and one that we cannot afford to fail. Public finance, linked to smart, enabling policies, has a critical role to play. Given the scarcity of public funds, governments contributions to closing the gap will depend on their effectiveness in mobilizing private. Experience demonstrates this is possible when supported by targeted financing mechanisms and institutional arrangements that blend private and public interests, expertise and resources to reduce risk and address bottlenecks preventing private. The Green Growth Action Alliance was created to accelerate this agenda at the 2012 G20 Summit in Los Cabos, Mexico. The Alliance s vision, one that I share and actively promote as its founding chair, is to drive greater in green growth by unlocking potential sources of finance. Collaboration between business, governments, civil society and international organizations in overcoming barriers to and securing the benefits of green growth is the DNA of the Alliance s approach. is the first report of the Alliance. It aims to inform and inspire policy-makers and public and private finance providers to close the gap in delivering inclusive, sustainable growth. It is the first time that a number of important institutions have joined to deliver a powerful message about the scale of the green gap that must be filled, and to spell out the ways and means to address the gap in green infrastructure. I appreciate this collective effort and would like to thank, in particular, Bloomberg New Energy Finance, the Climate Policy Initiative, the Global Green Growth Institute, the International Energy Agency, the OECD, the United Nations Environment Programme, the World Bank Group and the World Resources Institute for providing data, analysis, case studies and other support that enabled us to produce this report. I would also like to thank and congratulate the World Economic Forum for coordinating the whole effort and producing this report. is one of many ways in which the Alliance is advancing green growth. Its members are collaborating on initiatives that aim to prove the efficacy of financing green growth, from energy efficiency to renewable energy and climate-smart agriculture. It is, as the name states, an alliance for action. I invite G20 governments, public finance institutions, investors and policy-makers to read this report and join us in leading the way to making a difference. 4
Preface Dominic Waughray, Senior Director, Environmental Initiatives Thomas Kerr, Director, Climate Change and Green Growth Initiatives We live in an age of increasingly complex global challenges that mandate new approaches. As we witness the combined and increasingly inter-related challenges of the global economic crisis and the climate change crisis, we also witness the need for new forms of both dynamic and resilient global leadership to solve these challenges, using innovative, multistakeholder approaches. Arguably, mobilising the required scale of green lies at the core of the combined global economic and climate challenge and demands new such approaches for triggering action. This makes it a pertinent agenda for the World Economic Forum. Since receiving an invitation to create the 2009 G20 multistakeholder Task Force on Low Carbon Prosperity, the Forum has been delighted to support its members and stakeholders to trigger public-private innovation in this space, including the 2010 Critical Mass Climate Finance Initiative with the United Nations Foundation and the International Finance Corporation, supported by various institutional investor groups; and support to the 2011 Green Growth Business 20 (B20) Task Force for the French G20 Chair. From its investor community, the Forum also ran a successful series of complementary Green Investment Reports, 2009-2011, reporting on the state of the global clean energy agenda. During 2012, the World Economic Forum brought together these various workstreams to assist the Mexican G20 Chair with a series of refreshed B20 Task Forces that provided guidance and input to the G20 Summit in Los Cabos, including a Task Force on Green Growth. The Green Growth Task Force brought together for the first time leading public finance agencies, private investors, infrastructure and agriculture companies, and inter-and non-governmental organizations, with a specific focus to set recommendations for green growth. Task Force members took the decision to supplement their set of G20 recommendations with an offer to launch the Green Growth Action Alliance, a practical vehicle for action with a clear mission to advance the green agenda and to report on progress to the G20. The World Economic Forum is honoured to serve as the Secretariat of the Green Growth Action Alliance, and to help its members to achieve impact through advancing new solutions, engaging a wider set of public and private finance providers, and providing workable models on finance to existing platforms and institutions such as the United Nations Framework Convention on Climate Change, the United Nations Sustainable Energy for All Initiative, the World Bank Group, the International Development Finance Club, the Global Green Growth Institute, and the Global Investor Coalition on Climate Change. The Alliance now counts nearly 60 members collaborating to identify ways that limited public funds and public policies can be targeted to unlock and scale up private-sector, through identifying innovative financing and de-risking structures, supporting pilot-testing of new models in key regions, and feeding results into international processes. We hope this first report will provide a blueprint for action that government, business and civil society leaders can use to transform the global economy to an economically and environmentally sustainable pathway. We look forward to reporting on our progress in the future. 5
Executive Summary Greening global economic growth is the only way to satisfy the needs of today`s population and up to 9 billion people by 2050, driving development and well-being while reducing greenhouse gas emissions and increasing natural resource productivity. Considerable progress has been made in transitioning to green growth. Global in renewable energy in 2011 hit another record; up 17% on 2010 to US$ 257 billion. This represented a six-fold increase from 2004 and was 93% higher than in 2007, the year before the global financial crisis. Global agricultural productivity growth rates are exceeding overall population growth rates, and since 1990, more than 2 billion people have gained access to improved drinking water sources. Energy efficiency is widely recognized as providing economic opportunities and improved environmental security, while the fuel efficiency of vehicles has more than doubled since the 1970s. Developing countries are playing a growing role in scaling up green. Cross-border and domestic originating from non-oecd countries grew 15-fold between 2004 and 2011 at a rate of 47% per year (compared with 27% per year for OECD-originating ), albeit from a low base. Clean-energy asset financing originating from developing countries in 2012 is on track for the first time to exceed those originating from developed countries. This is due in part to the creation of green growth strategies by a number of developing country governments to advance water resources, sustainable agriculture, and clean energy. Developing country public finance agencies can accelerate this trend by targeting more of their funds to leverage private finance. Figure i: The evolution of global new asset finance flows for clean energy (US$ billions) Asset finance (US$ billions) 180 160 140 120 100 80 60 40 20 0 2004 2005 2006 2007 2008 2009 2010 2011 Northern-originating Southern-originating 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Proportion of Southern-originating (% of total) Proportion of Southernoriginating Note: Data includes new-build asset finance only. Source: Bloomberg New Energy Finance 1. Such progress, however, remains inadequate. Progress in green continues to be outpaced by in fossil-fuel intensive, inefficient infrastructure. As a result, greenhouse gas levels are rising amid growing concerns that the world is moving beyond the point at which global warming can be contained within safe limits. A recently published World Bank report warns that the world is on track for a global average temperature increase of at least 4 C above pre-industrial levels, bringing further extreme heat-waves, hurricanes and lifethreatening rises in sea levels. Natural resource productivity is not increasing quickly enough to stem the depletion of critical resources, notably water and forests. Soil erosion is accelerating and fish stocks are declining precipitously. Such trends, combined with growing climatic instability, are driving up commodity prices, threatening food security in a growing number of communities. Significant barriers exist to securing the required scale and pace of progress. The continuing global economic crisis has dimmed longer-term outlooks by business and governments. Financing for much-needed infrastructure is constrained by limits in public finance, policy and market uncertainty and the unintended consequences of financial market reform. Legacy fiscal measures such as fossil-fuel subsidies combine with the slow progress of international climate negotiations to weaken market signals that might otherwise incentivize green. Lack of awareness of private finance providers of green growth opportunities and continued in fossil-based resources are restricting progress. Greening at scale is a precondition for achieving sustainable growth. The required for the water, agriculture, telecoms, power, transport, buildings, industrial and forestry sectors, according to current growth projections, stands at about US$ 5 trillion per year to 2020. Such business-as-usual will not deliver stable growth and prosperity. New kinds of s are needed that also achieve sustainability goals. Beyond the known infrastructure barriers and constraints, the challenge will be to enable an unprecedented shift in long-term from conventional to green alternatives to avoid locking in less efficient, emissions-intensive technologies for decades to come. Taking the power sector as an example, in fossil-fuel intensive infrastructure is increasing annually and is higher than clean-energy. The International Energy Agency (IEA) predicts that an unprecedented long-term shift in over the next few decades from fossil fuels towards a cleaner energy portfolio is needed to avoid dangerous climate change. This is achievable by re-evaluating priorities, shifting incentives, building capacity, -grade policies and improving governance. 6
Figure ii: Conceptual assessment framework Business-as-usual approach Infrastructure * required to support global growth Transition Existing infrastructure # needs to be greened Enabling policy conditions, tools, mechanisms and instruments Green growth Additional # required to deliver green growth Notes: *Sectors assessed include water, agriculture, forestry, telecommunications, transport, power, buildings and industry. ^Quantity of business-as-usual that needs to be greened is not assessed. #Sectors assessed limited to transport vehicles, power, industry, buildings and forestry. There are additional, incremental needs of at least US$ 0.7 trillion per year to meet the climate-change challenge. This is needed for clean energy infrastructure, low-carbon transport, energy efficiency and forestry to limit the global average temperature increase to 2 C above pre-industrial levels. While the IEA predicts that corresponding fuel savings will more than compensate for these needs, there are significant policy, market and financial barriers preventing business from taking advantage of these profitable s. Additional needed to support green growth, beyond business-as-usual spending, in other sectors such as agriculture and water is not well known; further analysis is needed to better understand the full set of green needs across these areas. Figure iii: Total estimated requirements under business as usual and estimated additional costs under a 2 C scenario Total requirements : US$ 5.0 trillion / year Agriculture: $125 bn Telecommunications US$600 bn Transport infrastructure US$ 805 bn Buildings & industry US$ 613 bn Transport vehicles US$ 845 bn For policy makers Forestry: US$ 64 bn Water US$ 1,320 bn Energy US$ 619 bn + Additional requirements in a green growth scenario: US$ 0.7 trillion / year Buildings & industry US$ 331 bn Transport vehicles US$ 187 bn Forestry US$ 40 bn Energy US$ 139 bn Closing the green gap is affordable but needs to be supported by effective public policy. Public resources are limited, especially during the current period of austerity measures across much of the OECD. Therefore, reliance on public-sector must be minimised, and more attention paid to attracting private finance, which is at the core of the green growth transition. Assets being managed in the OECD amount to US$ 71 trillion; but deploying these assets toward green infrastructure is limited by policy distortions and uncertainties, market and technology risks, and reinforced by the reluctance of investors to take a longer-term view. Experience demonstrates the potential for closing the green gap by mobilizing private finance through the smart use of limited public finance. Evidence from climatespecific illustrates that the targeted use of public finance can scale up private financial flows into green through measures such as guarantees, insurance products and incentives, combined with the right policy support. While leverage ratios are difficult to compare across projects, countries and instruments, ratios of 1:5 and above are not uncommon, and there are some cases of instruments such as grants delivering much higher ratios. There is strong potential for increased lending, advancing and rolling out de-risking instruments, using carbon credit revenues, and targeting grant money combined with technical assistance to attract much greater private. The green gap can be addressed through the use of such instruments. If public-sector can be increased to US$ 130 billion and be more effectively targeted, it could mobilize private capital in the range of US$ 570 billion. This would come close to achieving the US$ 0.7 trillion of incremental required to move the world onto a green growth pathway. However, greening the remaining US$ 5 trillion in infrastructure will remain a major challenge requiring policy reform and a stronger push toward -grade policy. Figure iv: Potential public-private finance mobilization to close the cost gap for climate-specific Possible ratio: 1:4 1:5 (+400-500%) US$ 116 139 bn Required public Total required : US$ 698 bn US$ 558 581 bn Required private US$ 171 228 bn (30-40%) Required private - equity US$ 342 399 bn (60 70%) Required private debt Investment that needs to be greened Sources: OECD 2,3, IEA 4, Food and Agriculture Organization of the United Nations (FAO) 5, United Nations Environment Programme (UNEP) 6 Note: All data converted to $ 2010 equivalents Note: The debt-to-equity ratio is assumed at 70:30 based on the current average debt to equity ratio of clean energy projects 7
Leadership by governments, international financial institutions and private investors is needed to address the green gap. This first Green Investment report includes four recommendations that, if understood and acted on, could address the gap in green : 1. Greening, and thereby the economy, is the only option. Building from the 2012 G20 Summit, G20 leaders should reaffirm that greening the economy is the only route to sustained growth and development. 2. The transition is financially viable. The incremental costs of greening growth are insignificant compared with the costs of inaction. To accelerate and guide the green growth transformation, governments, investors and international organizations must improve efforts to overcome barriers and improve global tracking, analysis and promotion of green. 3. Effective policy pathways and the efficient deployment of public finance to green is well understood, tried and tested, and must now be scaled up. The G20 governments must accelerate the phasing-out of fossil-fuel subsidies, enact long-term carbon price signals, enable greater free trade in green technologies, and expand in climate adaptation. Investment-grade public policy is an important prerequisite to engage the private sector. Public financial institutions need to more actively engage private investors through scaling up deployment of proven instruments and mechanisms, while also designing new funds and tools to attract private finance for new opportunities. 4. Private investors will need to take a new approach to benefit from green opportunities. Green infrastructure can provide attractive long-term, risk-adjusted returns. Private investors should not wait for perfect public policies to remove any reasonable risk. They can enhance comparative risk analysis of green by making greater use of investor forums and engagement with public finance agencies to advance new financing solutions that open up an attractive, sustainable market. 8
Introduction Meeting global climate and environmental goals will require the greening of growth, while converting existing carbon-intensive assets The Organisation for Economic Co-operation and Development (OECD) estimates that our current path will add a further 3 billion people in developing countries into the middle classes within 20 years 7. This will create an unprecedented rise in demand for energy, water, transport, urban development and agricultural infrastructure. Meeting this demand while respecting planetary boundaries will be challenging; under current policies, water use is predicted to increase by 55% between now and 2050 8. Agricultural production will need to double in the same time span, leading to large-scale deforestation unless cultivation practices change. Energy demand, if left unimpeded, will rise by 85% by 2050 9, leading to a 4 6 C increase in global average surface temperatures. This will bring further extreme heatwaves, hurricanes and life-threatening rises in sea levels. Damage from Hurricane Sandy alone, which devastated portions of the Caribbean, mid-atlantic and north-eastern United States in October 2012, is estimated to have cost more than US$ 60 billion, while more than 250 lives were lost 10. Greening growth can alleviate the risks from future climate change and environmental degradation, and progress is being made. In the transport sector, the fuel efficiency of road vehicles has more than doubled since the early 1970s 11. In 2011, global in the renewable energy sector hit another record; up 17% on 2010 to US$ 257 billion, a six-fold increase from 2004. Investment was 93% higher last year than in 2007, the year before the global financial crisis 12. This growth was driven in part by government policy support that led to rapid decreases in the costs of renewable energy. These policies have come under review due to the current fiscal crisis, however, creating volatility in the global clean-energy markets in the past year. Markets are beginning to consolidate and prices are stabilizing 13, with the industry showing signs of restructuring. Further progress has been made in the water and forestry sectors. Since 1990, more than 2 billion people have gained access to improved drinking water sources an important achievement for one of the Millennium Development Goals to reduce by half the proportion of people without sustainable access to safe drinking water and basic sanitation 14. In the forestry sector, the United Nations Environment Programme (UNEP) estimates that more than US$ 64 billion is invested annually in forest protection and reforestation 15. Despite signs of progress, significant barriers still exist to securing the required scale and pace of in the transition to green growth. The continuing economic crisis in Europe and the United States, with its rippling global impacts, discourages business and governments from developing longer-term outlooks. Perverse incentives for carbon-intensive growth, such as fossil-fuel subsidies, prevent green technologies from gaining competitive advantage. The revolution in shale gas, while environmentally beneficial compared with coal, places downward pressure on carbon-intensive energy sources. This has the effect of making renewables comparatively more costly and less attractive s. Furthermore, green technologies often cost more at the outset or are more risky s than conventional alternatives, and this has limited the scope for their expansion into areas where they are needed most. Policy incentives provided by governments for cleanenergy development have in some instances been removed, which has resulted in new policy risks for green-technology. Rising costs from climate change are affecting economic forecasts. Recent storms demonstrate that conventional, business-as-usual trends may reduce economic resilience in the future by locking in a carbon-intensive path that leads to costly environmental damage and adaptation costs in the long term 16. Greening global growth requires a combination of strategically allocating limited public resources, public support to promote private-sector engagement, and increasing investor confidence. It also necessitates a change in future priorities and policies, as well as decarbonizing existing and planned infrastructure through carbon capture and storage (CCS) and energy efficiency. Current country emission reduction targets and climate finance pledges fall well short of the required level of action to secure green growth and limit temperature rise to manageable levels 17. Government leaders recognize these challenges and have incorporated green growth as an important theme for the G20 and other international processes. At the 2012 G20 Summit in Mexico, the Leaders Declaration referenced a number of green growth recommendations and welcomed the creation of the Green Growth Action Alliance to advance the green agenda (see Box 1). 9
Box 1: B20 Task Force on Green Growth: Recommendations from the 2012 B20 Summit in Los Cabos, Mexico The B20 Task Force on Green Growth proposed five priority actions: 1. Promote free trade in green goods and services: Initiate trade liberalization on sustainable energy products and services to eliminate tariffs, local-content requirements and other non-tariff barriers, and to coordinate industrial and technical standards. Such arrangements will create a tangible, positive incentive within the international trading system to develop and expand the use of green-energy goods and services, helping to accelerate progress on mitigating greenhouse gas emissions while promoting economic growth, access to energy and energy security. 2. Achieve robust pricing of carbon: Ensure a carbon price that is high and sufficiently stable to change behaviours and decisions. This will strengthen incentives to invest in economically and environmentally sustainable technologies. G20 leaders should ensure that national targets and policies are ambitious enough to create consistent international demand for carbon units and provide an essential foundation for an international carbon market. 3. End and redirect inefficient fossil-fuel subsidies: Develop national transition plans to phase out inefficient fossil fuel subsidies within the next four years and consider redirecting a portion of such subsidies to ensure access to energy for the poorest and to other public priorities, including green infrastructure s. This will reduce fiscal imbalances, increase real incomes and reduce greenhouse gas emissions and the overall cost of mitigating climate change. 4. Accelerate low-carbon innovation: Use revenues from carbon pricing measures to increase support for research, development, demonstration and pre-commercial deployment of low-carbon technologies by pooling international efforts. This will underpin innovative resourceand energy-efficient solutions, increase competitiveness and create business opportunities to drive long-term economic growth. 5. Increase the leverage of private s: Scale up risk mitigation and co- funding structures to help close the infrastructure financing gap. G20 leaders should call on sources of public finance to move from a project-by-project approach to a portfolio one to ensure there is support for initial project and programme development. Aims of this report This report is a first step by the Green Growth Action Alliance to deliver on the G20 Leaders request. It aims to provide a common point of reference to guide policy-makers, financial institutions and investors as they seek to better understand, and address, the global gap in green. This report documents and synthesizes the best available green data, research and case studies from a number of leading organizations, including Bloomberg New Energy Finance, the Climate Policy Initiative, the International Energy Agency, the Organization of Economic Cooperation and Development, the United Nations Environment Programme, the World Bank Group and the World Resources Institute, and provides important messages for different groups of stakeholders. New analysis is also presented on clean-energy asset finance flows, the findings of which can be used to guide decisions and priorities in other sectors. Policy-makers and development financial institutions can use this report to: Develop a common view on global flows of green in key sectors Analyse the gap between business-as-usual levels and the amounts needed to address climate change and other environmental challenges Identify successful, replicable interventions that unlock private finance with targeted public policies and public finance Investors can use this report to: Identify the leading green sectors and regions Demonstrate success in obtaining attractive returns from green Suggest mechanisms that target public finance and maximize private Report structure Part 1: Green Investment: Current Flows and Future Needs What are global green flows? What is required to achieve climate change and sustainability targets? Part 2: Unlocking Private Finance What is the role of public funds and public policy to mobilize private finance for green growth? Part 3: Catalysing Leadership and Private Investment What actions are needed to effectively scale up green? Note: Data includes new-build asset finance only. Source: Bloomberg New Energy Finance 1. 10
Part 1: Green Investment: Current Flows and Future Needs Securing green growth Investment required for the water, agriculture, telecoms, power, transport, buildings, industrial and forestry sectors under current OECD growth projections is approximately US$ 5 trillion per year until 2020. However, this business-as-usual will not lead to a stable future unless it achieves environmental and sustainability goals. Beyond the known infrastructure barriers and constraints, the challenge will be to enable an unprecedented shift in long-term from conventional a to green alternatives to avoid lock-in. This can be achieved by re-evaluating priorities, shifting incentives, building capacity, -grade policies b and improving governance. There are additional needs of at least US$ 0.7 trillion per year to meet the climate challenge. This is needed for clean-energy infrastructure, sustainable and low-carbon transport, energy efficiency in buildings and industry, and for forestry, to limit the global average temperature increase to 2 C above pre-industrial levels. In other sectors, incremental needs are unknown and more work is needed to understand these. Estimated separately, the additional requirements beyond current spending for adapting to climate change are estimated at US$ 0.1 trillion per year in a 2 C scenario. Current green flows Green flows have been summarized from different sources for climate-specific, notably renewable energy, energy efficiency, transport vehicles, forestry and climate change adaptation. In other sectors, such as transport infrastructure (roads and airports), buildings, industry, water and agriculture, flow estimates are lacking but business-asusual spending predictions can be used as a proxy. Total in climate-change mitigation and adaptation in 2011 were estimated at US$ 268 billion from the private sector and US$ 96 billion from the public sector (US$ 364 in total, of which US$ 14 billion was for adaptation). For a subset of this climate-specific, namely cleanenergy asset finance, has been growing at a rate of 32% per year since 2004. Investment flows in 2011 were up 93% from 2007, the year before the global financial crisis. In 2012, Southern-originating flows for clean-energy asset financing are set to exceed those originating from the North c. Most of this Southern finance is being used domestically and is an important emerging source of capital. Looking through the lens of climate-specific, financial flows still fail to close the cost gap. There is significant regional and technological bias in patterns. Investment is disproportionately focussed in the North and emerging markets, for wind and solar technologies in particular. To support global green growth and meet emission-reduction goals in a 2 C scenario, needs to rapidly scale up in other non-oecd countries and in general for renewable technologies beyond wind and solar. Investment in energy efficiency and sustainable transport are also lagging. Financing for climate-specific was split about 1:3 between public- and private-sector s in 2011. Part 2 of this report elaborates on the strong potential for increased private sector participation. Box 1.1: Defining the scope and methodology Scope of the report In order to measure, monitor and scale up progress in green, it is first necessary to define its scope. Efforts to date have focused on measuring and tracking s to reduce greenhouse gas emissions (mitigation) and to reduce the risks and impacts of climate change (adaptation). Global spending on infrastructure has generally been tracked separately. The diagram below presents a conceptual framework for greening with the scope of assessment for this edition of this report. There is no comprehensive assessment of in the various sectors. Data gaps have been identified for current flows and future requirements in nonenergy related sectors. Future editions of this report will aim to offer strategies to close these gaps, with a longer-term aim of obtaining a clearer picture of green-growth spending. a b The term conventional used throughout this report refers to typical business-asusual s, such as for fossil fuel-based power generation and transport, or infrastructure where alternatives exist that are more sustainable in their long-term environmental and social impact. Investment-grade policies are ones that are well designed to create an attractive and stable investor environment by reducing the risks of investing and increasing returns (UNEP Finance Initiative). c Southern countries are defined as non-oecd members and Northern countries are defined as OECD members throughout this report. 11
Figure 1.1: Conceptual assessment framework and scope of this report The frame of the assessment, which can be expanded in later editions, includes a synthesis of requirements from different sources (detailed in Appendix 1) to support growth under current projections. A subset of this business-as-usual needs to be greened to ensure that s are sustainable for a transition to green growth. This subset, however, has not been quantified in this edition of the report. In addition to for growth, additional is needed beyond business-as-usual spending in order for green technologies to limit climate-change temperature increases to 2 C above pre-industrial levels. This is assessed for transport vehicles, power, industry, buildings and forestry, but is unknown for other sectors, such as agriculture and water. The combination of greened business-as-usual and needed for green technologies comprise the total needs in a green-growth model for securing a sustainable future under a 2 C scenario. The assessment of sectors in this edition of the report is not exhaustive and is based on data availability. Future editions will aim to expand the number of sectors assessed and the scope of that assessment. Defining green growth and green Various definitions of green growth exist 18. For the purposes of this report the definition adopted by the Secretary-General of the United Nations (UNSG) High Level Panel on Global Sustainability is applied. The High Level Panel sets out a vision for growth that eradicates poverty and reduces inequality, while combating climate change and respecting a range of other planetary boundaries. In this context, an inclusive green-growth strategy is an important driver for innovation and creating sustainable wealth 19. Green is a broad term closely related to other approaches such as socially responsible investing (SRI) and sustainable, long-term investing. As most green is needed to retrofit existing and develop new infrastructure d, this report focuses on infrastructure spending but acknowledges the need for non-infrastructure spending, such as for capacity building, deployment, training and research and development, to enable green and inclusive growth 20. d 12 Business-as-usual approach Infrastructure * required to support global growth Transition Existing infrastructure needs to be greened Enabling policy conditions, tools, mechanisms and instruments Green growth Additional required to deliver green growth Notes: *Sectors assessed include water, agriculture, forestry, telecommunications, transport, power, buildings and industry. ^Quantity of business-as-usual that needs to be greened is not assessed. #Sectors assessed limited to transport vehicles, power, industry, buildings and forestry. Infrastructure can be defined as the basic physical and organizational structures and facilities needed to operate a society or enterprise that enables economic growth and facilitates the everyday life of citizens. Infrastructure can refer to transport (vehicles, roads, rail), water, energy and telecommunications. Green infrastructure can be defined as infrastructure that enables economic growth and at the same time improves the environment (quality of air, health of citizens), helps conserve natural resources, reduces emissions and enables adaptation to climate change. Green infrastructure could include renewable and low-carbon power plants, sustainable and low-carbon vehicles and transport, and energy-efficient, climate-resilient buildings. + Methodology This report collects and analyses three categories of data: Investment requirements in a business-as-usual scenario, under current policies. These are estimates of requirements to 2030 to support economic growth projections in a range of sectors, based on models and predictions from the OECD, the World Bank, the Food and Agriculture Organization (FAO) and United Nations Environment Programme (UNEP), in a scenario where green growth and climate change is not a priority. Investment requirements in a 2 C scenario, where climate change is a priority. These are estimates from the International Energy Agency (IEA), UNEP and the World Bank of requirements to 2030 in a range of sectors based on a scenario where the effects of climate change are kept at bay. Current known and historical flows. These are limited to climate-specific s: mitigation and adaptation, summarized by the Climate Policy Initiative e. The landscape and cost gap: Business-as-usual data was collated from the sectors outlined above and is presented below. Any incremental costs were calculated by subtracting the requirements in a scenario that aims to stabilize the global climate at 2 C from those under a business-asusual scenario. Climate-change adaptation requirements were not aggregated and are presented separately. Collated data was not altered in any way, apart from converting United States dollar amounts to their 2010 rate for ease of comparison. All data sources, assumptions and calculations are provided in Appendix 1. It should be noted that the gaps presented in this report should be taken as indicative, and as a lower-range estimate, because further work is required to include other sectors and incremental costs to strengthen the scope of the analysis. Green flows: A subset of climate-specific public and private is studied in more depth. Of this, new-build asset finance for clean energy (comprising about half of the total ) is presented in directional flows between countries and domestic sources of finance. About US$ 5 trillion in global infrastructure is required per year to 2030 in various sectors; this must be greened to secure future growth To support a future global population of 9 billion people an estimated US$ 5 trillion per year needs to be invested in global infrastructure (~US$ 100 trillion over the next two decades, Figure 1.2). This business-as-usual approach would maintain in conventional, emissions-intensive technologies, endangering future growth. A 2012 World Bank report 21 highlighted that the planet is on track for a global average temperature rise of at least 4 C beyond pre-industrial levels, which would bring impacts detrimental to growth, including unprecedented heat waves, severe droughts and major floods. The McKinsey Global Growth Institute has estimated that rates of environmental degradation are unsustainable for the long-term functioning of the global economy 22. Existing and future, therefore, must be greened to avoid dangerous levels of climate change and adverse environmental impacts that could erode the benefits from new green developments; if non-green s continue to grow in parallel with increased in green infrastructure, it will not be possible to achieve green growth f. e f The scope of current mitigation flows includes: in renewable energy generation, energy efficiency, sustainable transport, agriculture, forestry and land-use, waste and waste water, capacity building and technical assistance, fuel switching and others. The scope of current adaptation flows includes: in agriculture and forestry, water preservation, supply and sanitation, infrastructure, capacity building and technical assistance, disaster risk reduction and others. For example, the World Resources Institute estimate that 1,199 new coal-fired power plants with a combined capacity of 1.4 TW are currently being proposed globally, with China and India together accounting for 76% of the proposed capacity (Global Coal Risk Assessment, WRI, November 2012). Without carbon capture and storage, these s significantly dampen the benefits of parallel in clean energy.
Figure 1.2: Total estimated business-as-usual requirements and additional under a 2 C scenario Total requirements : US$ 5.0 trillion / year Agriculture: $125 bn Telecommunications US$600 bn Transport infrastructure US$ 805 bn Buildings & industry US$ 613 bn Transport vehicles US$ 845 bn Additional requirements in a green growth scenario: US$ 0.7 trillion / year Buildings & industry US$ 331 bn Forestry US$ 40 bn Energy US$ 139 bn Table 1.1 collates and normalizes as much as possible the requirements from different sources for various sectors under business-as-usual growth and under a 2 C scenario. The next section in this chapter focuses on the agriculture and water sectors, where the incremental costs under a 2 C scenario are not well known; a qualitative explanation is offered. More work is also needed to understand the financial implications for adaptation in the IEA s Current Policies (6 C) scenario, and the incremental costs for the telecommunications sector. Finally, this chapter estimates incremental costs (under a 2 C scenario) for the energy, buildings, industry, transport and forestry sectors. For policy makers Forestry: US$ 64 bn Water US$ 1,320 bn Energy US$ 619 bn Transport vehicles US$ 187 bn Table 1.1: Annual estimated s needed under a business-as-usual and low-carbon scenario (US$ billions per year between 2010 and 2030) Investment that needs to be greened Sources: OECD 23,24, IEA 25,UNEP 26, FAO 27 Business-asusual scenario needs 2 C scenario needs Incremental required While greening is one aspect of the challenge, the key is to secure financing for infrastructure needs in general. Approximately US$ 24 trillion is earmarked to be spent on infrastructure before 2030, falling short of the cumulative US$ 60 trillion needed 28. Development capital needs are in addition to the annual US$ 5 trillion figure cited in this report, and the IEA estimates that the share of energy-related in public research, development and demonstration has fallen by two thirds since the 1980s 29. Better inter-agency planning and strategic integration is required to determine common greengrowth goals between sectors. More work is needed to better understand the needs in the agriculture, water, transport infrastructure and telecommunications sectors. In the power generation, buildings, industry and transport vehicles sectors, the IEA has estimated there will be significant incremental capital costs for technologies beyond business-as-usual spending. Business-as-usual and incremental costs in sectors beyond the scope of assessment have not been assessed in this edition of the report. It is possible that for some sectors, the incremental costs could be lower for some types of infrastructure in a 2 C scenario compared with a business-as-usual scenario. For example, in infrastructure to transport and distribute oil and gas should be less than the US$ 155 billion per year (2005 US$) projected by the OECD under a business-as-usual approach. Transporting fossil fuels accounts for more than 40% of the tonnage of maritime trade and more than 40% of rail tonnage in the USA; so the expected increases in s in port and marine infrastructure under a business-as-usual approach should be lower in a 2 C scenario 30. In all sectors, the green-growth challenge is multi-faceted: Capital costs for infrastructure to support growth are high and not being met. Other than clean energy, flows are not well documented. To ensure growth is sustainable, an unprecedented shift in long-term is required from conventional to green alternatives, producing synergies between development and the greening of growth. There are also incremental needs for technologies such as CCS that carry greater risks for investors. Research and development spending is equally important to help demonstrate and commercialize green technologies. Sector Cumulative 2010 2030 Annual average Cumulative 2010 2030 Annual average Cumulative 2010 2030 Power generation 6,933 347 10,136 507 3,203 160 IEA Power transmission and development Annual average Sources 5,450 272 5,021 251-429 -21 IEA Energy total 12,383 619 15,157 758 2,774 139 Buildings 7,162 358 13,076 654 5,914 296 IEA Industry 5,100 255 5,800 290 700 35 IEA Building & Industrial total 12,262 613 18,876 944 6,614 331 Road 8,000 400 8,000? 400? - - OECD Rail 5,000 250 5,000? 250? - - OECD Airports 2,300 115 2,300? 115? - - OECD Ports 800 40 800? 40? - - OECD Transport vehicles 16,908 845 20,640 1,032 3,732 187 IEA Transport total 33,008 1,650 36,740 1,837 3,732 187 Water 26,400 1,320 26,400? 1,320? - - OECD Agriculture 2,500 125 2,500? 125? - - FAO Telecommunications 12,000 600 12,000? 600? - - OECD Forestry 1,280 64 2,080 104 800 40 UNEP Other sectors unknown unknown unknown unknown unknown unknown Total 99,833 4,991 113,753 5,689 13,934 698 ~$100 tr ~$5 tr ~$114 tr ~$5.7 tr ~$14 tr ~$0.7 tr Sources: OECD 31, 32, IEA 33, FAO 34, UNEP 35. Data presented in US$ 2010 rates. Note: Total does not include synergy effects that can occur between other s besides energy, buildings and industry and transport. The total amount provided is a proxy of future. Investment in water and telecommunications infrastructure covers the OECD and emerging markets only. Investment in agriculture covers 93 developing countries only. See Appendix 1 for full details of assumptions, scope and calculations. 13
Agriculture The Food and Agriculture Organization (FAO) has estimated the gross requirements for primary agriculture in developing countries at US$ 125 billion per year to 2030. The FAO further breaks this down by the need to replace existing capital stock (60%) and for new capital stock (40%) to increase agricultural productivity to double current levels by 2050 36. In practice this means that energy for production will need to be low carbon (for both vehicles and electricity needs), and research and development will need to focus on livestock and crop practices that reduce emissions, require less fertilizer and chemical input, and provide climate-resilient crop varieties. Agricultural growth needs to be more inclusive, supporting the equitable reduction of poverty and hunger, and balanced with preserving existing high-value ecosystems. This productivity revolution in the sector could require additional costs beyond current spending but no estimates exist of the incremental cost for greening the agricultural sector. The International Food Policy Research Institute estimates that only 6% of in agriculture in developing countries is from private sources, compared with 55% in developed nations 37. Private from foreign and domestic sources will need to be mobilized to deliver most capital requirements, particularly for equipment, to develop infrastructure and maintenance, and for research and development for new crop varieties and breeds. Reducing subsidies for input-intensive agriculture could release funding to bring about private. Water As the world s population tripled in the 20th century, water consumption increased in absolute amounts and per capita. Rapid demographic and economic growth has put increasing pressure on the quality and quantity of water resources. With a growing population, water resources must be managed effectively to address water pollution, excessive consumption, preserve the ecology and the environment, and to safeguard the hydrological cycle in general while providing adequate, longterm supplies of acceptable-quality water for domestic, industrial and agricultural needs. The OECD estimates that US$ 1.3 trillion g needs to be invested annually 38 to replace and maintain water infrastructure in developed countries and emerging markets alone. In addition to these baseline financial needs, effective policies and finance are needed to support new, resilient infrastructure. Climate change adaptation A world that is at least 2 C warmer than in pre-industrial times will experience heightened rainfall and more frequent and intense weather events, such as flooding, droughts and heat waves. The Intergovernmental Panel on Climate Change s (IPCC) Fourth Assessment Report illustrates the strong links between climate adaptation and growth. For example, more than one sixth of the world s population lives in areas supplied by glacial melt water, and as glaciers decline, so will long-term water availability. Coastal areas are in danger of being flooded due to impending rises in sea levels, with poorer communities the most vulnerable due to lack of adaptive capabilities. Highly negative health impacts are predicted from increased transmission of disease 39. g 14 This number is an underestimate, covering mainly urban water services and to a lesser extent rural water services. It relates to mainly replacement, maintenance and repair in Europe and North America rather than additions to existing networks. The World Bank estimates the cost of adapting to a 2 C increase in global average temperatures will be US$ 85 121 billion h per year between now and 2050 40. However, under the IEA s Current Policies scenario (6 C), adaptation costs will be significantly higher and have not yet been fully estimated, for example, to ensure that disasters are managed and development is more resilient to extreme weather events. Furthermore, there is no certainty that adaptation is possible beyond 2 C of warming 41. The Climate Policy Initiative estimates flows for climate adaptation of US$ 12 16 billion in 2011 42, implying a shortfall of US$ 69 109 billion per year in adaptation. At least US$ 0.7 trillion in incremental costs beyond businessas-usual spending is required to support green growth Aside from the challenge of greening in the sectors described above, to achieve climate stabilization at 2 C at least US$0.7 trillion in incremental, net is needed beyond spending under a business-as-usual approach (a further ~US$ 14 trillion by 2030) i. Data on current and historical flows in low-carbon transport, building energy efficiency and green industrial spending is insufficient. Further analysis is needed to improve estimates of the necessary flows beyond what is predicted under a business-as-usual scenario. To define the incremental cost gap, this section assumes will follow a business-as-usual path in line with the IEA s Current Policies (6 C) scenario. The incremental costs are for s in power generation, transport vehicles, energy efficiency in buildings and industry (sourced from the IEA) and forestry (sourced from UNEP Finance Initiative). The US$ 0.7 trillion per year in net new takes into account an estimated US$ 146 billion per year in business-asusual energy spending that would need to be redirected from conventional outlays for fossil fuel-powered electricity, heat and transport to less-emitting options. Setting forestry aside, half of the incremental cost is needed for energy efficiency while the remainder is needed to cover s to decarbonize power generation and transport. The IEA estimates that these incremental costs are economically viable: the corresponding predicted fuel savings will more than compensate for the higher needs in the transition to a low-carbon energy sector. Between 2010 and 2050, even when applying a 10% discount rate to savings from reduced demand for coal, gas and oil, the IEA forecasts a net saving of about US$ 5 trillion over the period, indicating that decarbonizing the energy system is clearly affordable 43. More spending will need to be diverted from conventional to clean power in the future, with a much higher proportion of spending targeted in the renewables sector under a 2 C scenario The IEA estimates that total requirements of the power sector are US$ 758 billion per year or US$ 15 trillion to 2020 j (Figure 1.3). Investments are needed in conventional (fossil) and clean and renewable technologies but reduced in fossil fuel-based energy generation provides some relief (46%) towards the incremental capital required for renewables, nuclear and carbon capture and storage. For coal and gas power, carbon capture and storage is a critical technology that requires much greater ; US$ 52 billion per year in total to 2030 on top of the needs for gas and coal power generation. By 2050, almost all gas and coal power infrastructure will need to have carbon capture and storage under the 2 C scenario 44. h i ji Numbers adjusted to US$ 2010 rates. See Appendix 1 for a breakdown of needs and sectoral scope assumptions. Power sector scope includes: coal, gas, transmission and distribution, renewable energy such as wind, solar and others, nuclear and carbon capture and storage.